Is India's Economy on the Rise?

This momentum largely results from India's continuous growth. Last year, India surpassed China to become the world's most populous country, with 1.4 billion citizens—more than half of whom are under age 30. In addition, S&P Global predicts India will overtake Japan and Germany to become the third-largest economy by 2030.¹

• Supply-chain relocation: The supply-chain issues created by the COVID-19 pandemic exposed the world's disproportionate dependence on China, prompting many companies to diversify into India. For example, Apple ramped up iPhone production in India last year and now produces nearly 7% of its smartphones there.² As India improves its manufacturing and logistics capabilities—which climbed six places on the World Bank's Logistics Performance Index³ between 2018 and 2023—more companies are likely to follow suit, further attracted by the country's legions of young workers.
• Government stimulus: To attract more manufacturing to the country, India is easing regulatory burdens, investing in roads and other infrastructure, and offering tax incentives and rebates. Its efforts appear to be working: Gross foreign direct investment reached a record 84.8 billion in 2022, and all investment as a proportion of gross domestic product (GDP) reached a 10-year high of 34% in 2023, according to S&P Global.⁴
• Domestic demand: Local services currently account for more than half of India's GDP.⁵ That makes the country less reliant on exports and less vulnerable to shifts in the global economy—something investors have latched onto as demand for goods has cooled worldwide and manufacturing has entered a downturn.

• Workforce imbalance: Nearly half of India's labor force works in agriculture⁶—a fact that has restrained the country's output per worker. The sector contributes around 15% to India's GDP versus 19% from manufacturing, which employs only about 27% of the workforce.
• Workforce participation: India's labor force participation hovers around 40%—much lower than the 65% global average and far less than China's 76%. Weak job creation combined with a growing pool of young workers is a major culprit, but so is a culture that is less supportive of women—especially married women—entering the workforce.⁷ In fact, India's female labor-force participation rate fell from 31% in 2000 to 24% in 2022.⁸
• Expensive stocks: Based on our analysis as of December 2023, Indian stocks were more expensive than their long-term average, perhaps already pricing in the country's potential for growth. (By comparison, Chinese stocks were trading at a discount to their long-term average.) For India's performance advantage to persist, local companies will need to maintain their expected earnings growth—which is entirely possible but hardly a given.